Rate of Return Stops and Capital Return Transactions

ABSTRACT

A method and system for managing and selling investments via electronic means. An investor can establish sell order criteria based upon a preset desired rate of return. The broker thereby monitors the investment and automatically sells it on behalf of the investor once the prescribed sell order criteria are met. The investor can effectively lock in a rate of return prior to its sale without monitoring. Also provided is a method and system for returning to the investor a portion of the initial investment. Once the investment reaches a predetermined value, three simultaneous events occur. A portion or all the initial invested capital is returned to the investor for purposes of reinvestment. The investment instrument is transferred to the broker as collateral, given that its value appreciated relative to the initial purchase amount. Yet the investor still owns the “rights” to the capital appreciation for the life of the investment.

CROSS REFERENCE TO RELATED PATENT APPLICATIONS

This application is a continuation of U.S. Nonprovisional patentapplication Ser. No. 12/914,637 filed on Oct. 28, 2010, which is adivisional of U.S. Nonprovisional patent application Ser. No. 11/281,632filed on Nov. 17, 2005, which claims priority to U.S. ProvisionalApplication No. 60/628,844 filed Nov. 17, 2004, each application ofwhich is herein incorporated by reference in its entirety.

TECHNICAL FIELD

An embodiment of this invention involves a computer method and systemfor automatically selling investments based upon a preset rate of returncriteria, relative to the initial purchase price or relative to otherinvestments. It also relates to a method and apparatus for returningsome portion of the initial capital, once a predetermined appreciationlevel is met, while simultaneously preserving the investor's right tothe capital gains.

BACKGROUND OF THE INVENTION

There are two major components of this invention. The first involves theutilization of a minimum annualized rate of return (or maximum rate ofloss) in determining when an investment is automatically sold. This rateof return can be relative to the initial purchase price and/or relativeto other investments. The second aspect involves a mechanism that allowsfor all or a portion of the invested capital to be returned to theinvestor once a predetermined capital gain criterion is met. Even thoughthe broker returns a portion of the underlying capital, the investorcontinues to enjoy the capital gains until such time the investment issold. In exchange for this privilege, the broker could command a highercommission rate from the investor, perhaps by sharing a percentage ofthe capital gains.

Rate of Return Stop

Investors carry a heavy burden of monitoring the value of theirinvestments. From the time of purchase until such time the investment issold, they must constantly monitor the value of the investment. Thismonitoring burden is compounded when numerous investments have beenpurchased. Factoring in price volatility, the need to continuouslymonitor the valuation is further intensified.

There are numerous methods to either monitor the valuation ofinvestments or sell them on behalf of investors. One major differencebetween the present invention and other “sell order stops” is that “rateof return stops” monitors what matters most to investors—the rate ofreturn, not just an absolute gain.

Some of those “sell order stop” methods simply monitor and notify theinvestor when an absolute predetermined value is met. Other methodscommunicate and/or actually trigger a sell order automatically once theinvestment reaches predetermined valuation level. Often the “trigger”price is based upon some value below the initial purchase price, therebyprotecting from further loss; or it is based upon a predeterminedappreciation level, thereby preserving the capital gain. For example, anotification and/or sell order may be automatically executed if a stockfalls below $95 or above $100. Basic stop and limit orders have been inexistence for decades.

Some stop orders are highly sophisticated. trailing stops, for example,follow the appreciated value of the investment. The sale of theinvestment is based upon the highest appreciated value, less apredetermined amount. For example, a stock purchased at $50 thatappreciates to a high of $60 may be triggered by a sell order once thevaluation reaches $58, or, stated differently, its highest valuationamount, less a predetermined value of $2. Other versions of the sameconcept include, “Turtle Trading”, “Price Channel Breakouts” and“Donchian Breakouts”. In all these instances, the trigger price is basedupon an absolute market value of the investment—not the investor's rateor return.

There are a number of inherent risks in these approaches. Thenotification only approach could cause a delay in reaction time. Theinvestor that receives the phone call must find time to request a sellorder via a broker or electronically. In that time, the valuation coulddecline. Either the amount of the appreciated gain is lost or, worse,the delayed reaction time may even wipe out a portion of the initialinvested capital.

Even those methods that trigger a sell order automatically have a majorinherent risk. They do not take into consideration each investor'sdesired rate of return. The sell order triggers are based upon anabsolute value—either relative to the initial purchase price or thehighest valuation—not what the investor desires from a rate of returnperspective. For example, the rate of return for a stock purchased at$50 and sold at $58 is very different from the rate of return on a $100purchase that is sold at $108. In both cases the capital gain value is$8. However an $8 gain on $50 is a 16% return; versus an 8% gain on$100.

These other approaches also do not take into account the “time value ofmoney”. What investors care about more than anything else is their rateof return. Not an absolute appreciation value. This is a criticaldistinction relative to traditional approaches.

Which has a better rate of return, a stock that is purchased at $100 andsold 30 days later at $103, or the same stock purchase that is sold in200 days at $108? If the more traditional approaches were used, thetrigger price would likely be $108, or a 15% annualized return.Conversely, if a rate of return approach were used, the stock would havebeen sold at $103, or a 43% annualized rate of return. In the former,dollar based approach, 170 days—and 3 times the rate of return—wouldhave been wasted. In the latter case, the investor can fully capture the43% annualized rate of return and then reinvest in other high returninvestments, thereby compounding the cumulative rate of return.

Another consequence of using either the basic stop orders or moresophisticated versions of stop orders is they actually cause morevolatility in the market. If a large percentage of investors choose tosell based upon similar valuation based criteria, then the market pricewill drop precipitously. Under such circumstances there are simply toomany sellers relative to buyers. The rate of return approachsignificantly limits the onslaught of sellers. Since each investorpurchases at a different prices, at a different time-frame, and eachhave a unique rate of return criteria, the likelihood of numerousinvestors wanting to sell at the same time is sharply reduced, therebyreducing potential market volatility.

Another common means of protecting a loss relative to the initialinvestment value is the use of options. Options provide the investorwith the right—not the obligation—to purchase (in the case of “calloptions”) the underlying investment. For example, an option that ispurchased on a stock that is trading at $75 and has a strike price of$80 wouldn't be a loss to an investor if the stock never exceeds$80—other than the transaction costs (the price of the option pluscommissions). Therefore the risk of losing the transaction cost onoptions is very likely, relative to other investment types. They alsohave other limitations. They also do not take into account theinvestor's unique rate of return or the “time value of money”. They alsohave a limited duration in which they expire. Rate of return stops canlast in perpetuity so long a sell order is not triggered.

With options investors not only need to constantly monitor the optionprice itself, but they also have to simultaneously monitor the price ofthe underlying asset. If the option price increases, the investor maychoose to sell the option itself. If the value of the underlying assetimproves relative to the absolute value of the “strike price”, then theinvestor may “exercise” the option.

Futures, another common investment instrument, have many of the samelimitations as options. In addition, futures are largely limited tocommodities, such as grain, livestock, metals, currency, and oil—not allasset types.

The present invention can be used on the purchase of stocks, bonds,options, futures, indices, mutual funds and all other investmentinstruments that have market based fluctuating valuations.

In the same way a minimum rate of return can be established at the timeor purchase or thereafter, the maximum rate of loss can also beutilized. An investor, for example may establish a minimum annualizedrate of return of 10% and a maximum annualized rate of loss of 4%.Therefore the investor can simultaneously minimize a loss and protect acapital gain.

Another unique advantage of rate of return stops is to compare rate ofreturn relative to other investments. In particular an investor canchoose to trigger a sell order in the event other investment(s) aresignificantly outperforming the current investment. For example, if thecurrent investment at the prevailing market price has a rate of returnof 1%, and comparison investment(s) have returns of 5-6%, the investormay choose to trigger a sell order and/or purchase order to buy thosecomparison investments. There are no known stops or financialinstruments that have such a comparison on a relative basis.

So rate of return stops have a number of advantages over traditionalstops and even other financial instruments. It addresses what mattersmost to investors—the annualized rate of return. They can be used on allassets types, they are not limited in duration, and they are lessvolatile in the general market.

Capital Return

In today's investment environment, when an investment is made, theinitial capital is tied up until such time it is sold. Meanwhile otherinvestment opportunities come and go, leaving the investor on thesidelines from other, potentially more lucrative investmentopportunities. The investor is faced with a dilemma: either sell thecurrent investment to reinvest in yet another, or hold the currentinvestment in hope of generating a better overall return. Both optionshave inherent risks.

Another alternative is for the investor to take out a loan, using theinvestment as collateral. With exception to brokerages, most financialinstitutions would not consider such a loan, given the uncertainty offuture valuations. Other financial institutions would only offer a loanat 60% of less of the valuation, and likely charge a higher interestrate. In either scenario, financial institutions view collateral againstinvestments as risky because of price volatility and, most importantly,because they do not control the conditions at which the investment issold.

Certainly the investor has the option of “buying on margin”—or borrowingfrom the broker at the time of purchase. This allows investors with theability to in effect hold aside a portion of their investment capitaluntil such time another investment opportunity comes available. Not onlydo margin accounts involve a interest payment for the privilege ofborrowing, but brokers are limited in the percentage of the investmentvalue they can loan. Typically this limitation is 40%. Anotherconsequence of holding aside investment capital is that those funds arenot generating a sizable return. Investors that hold funds in moneymarket and other high liquidity accounts, get a very low rate of return.This rate of return is far lower than the cost of borrowing on a marginaccount, thereby creating a net loss transaction.

Another aspect of this invention involves a guaranteed sell order price.Today when a sell order price is established (either manually or viasell order stops), the sell order itself is not initiated until thecurrent market price equals the threshold price. Since other investors'sell orders may be “ahead,” those are processed first. By the time thesell order is actually executed, the market price may have worsened. Theguaranteed sell order price would eliminate the investor's risk of pricedeterioration, wherein the broker anticipates the best timing to sellthe investment. The guaranteed sell order price applies to rate ofreturn, capital return and all traditional transactions.

SUMMARY OF THE INVENTION

In an embodiment, the present invention provides a method and system foraccomplishing two major objectives on investing: establishing the sellorder criteria based upon a preset desired annualized rate of return,relative to the initial purchase price or relative to other investments;and facilitating the return of some portion of the initial investedcapital, while simultaneously maintaining the investor's right toongoing capital gains.

Rate of Return Stop

The rate of return aspect involves the establishment of preset criteriain which the investment is sold. The investor, at the time of purchaseor thereafter, communicates sales criteria to the broker based upon theinvestor's uniquely desired rate of return. These criteria may beestablished in any combination of the following forms: a minimum rate ofreturn on capital gains, and a maximum rate of loss.

The investor or broker enters in these criteria into a computer systemthat monitors the market value of the investment relative to thesemaximum and minimum rates of return.

Upon setting these criteria, the investor and broker needn't monitor theprevailing market value of the investment. If the market value stayswithin the prescribed minimum and maximum rate of return parameters,then no action is taken. If the stock appreciates beyond the minimumdesired rate of return, the investment is automatically sold for a rateof return above the investor's expectations. Conversely, if the marketvalue approaches the preset maximum rate of loss, the investment isautomatically sold, thereby protecting against further loss.

Once the investment is automatically sold, a computer system canautomatically send a notification to the investor and/or the broker. Atthat time, the proceeds can be reinvested.

The rate of return approach embodied in this invention can also becombined with other traditional approaches. For example, an investor mayrequest a rate of return of 10% and a minimum stop order gain of $3 pershare. For a purchase price of $25, the sell order wouldn't triggeruntil $28. Even though the 10% rate of return criteria is met at $27.50at the end of year one, the $3 requirement would supersede, and therebynot trigger a sell order. The stock is only sold in the when the greaterof $3 or a 10% annual return condition is met.

Just as rate o return stops can be established relative to the initialpurchase price of the investment, they also can be established relativeto the performance of other investments. Suppose an investor wants torealize a rate of return above that of the market. Using the S&P 500(Standard & Poor's) as a proxy for market performance, the investor maywish to be notified and/or a sell order transaction executed in theevent the market outperforms the initial investment by more than 5%.

Suppose that at the time the investor purchases a stock at $100 the S&P500 is at 1,200.00. In one year the stock is valued at $101, or a 1%return. The S&P 500 index, meanwhile, is 1,278.12, or a 6.5% return.

1 Year Purchase Price Market Price Rate of Return Stock 100.00 101.001.0% S&P 500 1,200.00 1,278.12 6.5% $\; \begin{matrix}{{{Relative}\mspace{14mu} {Rate}\mspace{14mu} {of}\mspace{14mu} {Return}}\mspace{11mu} = {\left( {\frac{\frac{1278.12}{1200.00}}{\frac{101.00}{100.00}} - 1} \right)*100\%}} \\{= {5.5\%}}\end{matrix}$

This suggests that other stocks represented in the S&P 500 areoutperforming the investor's holding and, consequently, the investor maychoose to sell the existing stock and purchase the index itself, or astock(s) represented in the index.

The following is a generic representation of the relative rate of returncalculation.

${{Relative}\mspace{14mu} {Rate}\mspace{14mu} {of}\mspace{14mu} {Return}} = {\frac{\left( {R\; {2/R}\; 1} \right)^{({1/{nr}})}}{\left( {S\; {2/S}\; 1} \right)^{({1/{ns}})}} - {100\%}}$

S1=Initial value of the existing investment

S2=Current market value of the existing investment

R1=Initial value of the investment being compared

R2=Current market value of investment being compared

ns=Duration period of the existing investment

nr=Duration period of the investment being compared

Note that the duration periods can be different. The duration period ofthe existing investment is the length of time it is owned. The durationof the comparison investment can be the same or less than that of theexisting investment. For example, while holding the existing investment,the investor may choose to start tracking the relative performance of anindex.

Alternatively the comparison can be based upon the absolute rate ofreturn difference between the existing investment and the comparisoninvestments. In the previous example, the absolute difference is 5.5%(6.5%-1%), or generically:

[(R2/R1)^((1/nr))]−[(S2/S1)^((1/ns))]

Comparisons can be relative to more than one investment. For example, aninvestor can choose to simultaneously compare to the Dow JonesIndustrial Average (DJIA), S&P 500, individual stocks, or otherfinancial instruments. A point can be set at which a pre-set conditionis met relative to any one of the comparison investments, whereby theinvestor is notified and/or the investment is automatically sold.

This comparison approach can also trigger a simultaneous notification,sell order, and purchase order. For example, an investor may beconsidering the purchase of a new stock. The investor in turn modifiesthe relative rate of return criteria of an existing stock holding tocompare against the prospective stock. If at some future point therelative return of the prospective stock exceeds the criteria set fordefining a trigger event for the existing stock, the existing stock isautomatically sold and the prospective stock is automatically purchased.Unlike most sell order transactions wherein the cash generated from thesale sits dormant until such time a new investment can be researched andsubsequently purchased, this preplanned investment approach immediatelyconverts the cash into a new investment. By eliminating the dormantperiods between investments, the investor's overall rate of return isimproved.

Given that multiple investments can be simultaneously compared, purchasecriteria can be established on the basis of selecting the bestperforming comparison investment at the time of the sale of the existinginvestment. Since short-term market information can be more meaningful,comparison investments can be evaluated on a rolling timeframe (e.g., arolling 3-month period). This rolling approach and evaluating shortertimeframes, provides more sensitivity in determining relative pricing onprospective investments.

Another aspect embodied in this invention is to simultaneously comparethe relative valuations—on a rate of return basis—of options and futuresthemselves as well as the valuation of the underlying asset. Bysimultaneously evaluating the greater return of the stock option priceitself, the underlying stock, and the stock gain relative to the optionprice, the investor has a greater chance of recognizing a significantreturn on invested capital. One skilled in the art would recognize thatsuch simultaneous monitoring does not exist on an automated basis. Thisapplies not only to stocks, but also bonds, commodities, and other typesof underlying assets.

This simultaneous monitoring can be done singly or in aggregate. Bymonitoring multiple investments singly, an investor can choose at apoint in time to sell only those investments that exceed a minimum rateof return. Alternatively, multiple investment values can be aggregatedto determine the best rate of return of the combined investment values.For example an investor can employ a straddle strategy on options inwhich simultaneous “out of the money” “call” and “put” options arepurchased on the same underlying asset. As the market value changes onthe underlying asset, the “call” option value may improve at a greaterrate than the “put” option value degrades, or vice versa. Bysimultaneously evaluating the investment values singly and in aggregate,the best rate of return combination can be triggered. (Note that thecapital loss on the declining investment can be evaluated on atax-adjusted basis.)

As seen in FIG. 16, this method for managing an investment can determinea first rate of return for at least one derivative, 1601. The method candetermine a second rate of return for at least one asset associated withthe derivative, 1602. The method can determine a trigger event for afuture trading period based on the first rate of return and the secondrate of return, 1603. The method can perform a transaction associatedwith the derivative and the asset based on the first trigger event andthe second trigger event, 1604. The first rate of return can be the sameas the second rate of return. The derivative can be an investment suchas, an option, Exchange Traded option, Exchange Traded Fund (ETF),futures contract, warrant, convertible bond, and financial contract. Theasset can be an investment such as, a stock Exchange Traded Fund (ETF),bond, currency, index, and mutual fund. An ETF's are blocks of specific,unmanaged stocks that can be bought and sold in the market place justlike an individual stock. Exchange traded funds can be used to obtainbroad market exposure in specific investment sectors, such as realestate, biotech or high tech, without having to buy individual stocks.

The trigger event can occur when the current market rate of return forthe derivative is greater than the first rate of return. The transactioncan be selling the derivative. Alternatively, the trigger event canoccur when the current market rate of return for the associated asset isgreater than the second rate of return. In that case, the transactioncan be exercising the derivative to purchase the associated asset.

The first rate of return and the second rate of return can be adjustedfor a factor such as transaction costs, management expenses, taxconsequences, dividends, DRIPS's and bond coupons.

Even when investments are purchased at differing time frames and atvaried purchased amounts, an aggregate rate of return can be calculated.By evaluating the timing and amount of the cash flows, an investor canmake an informed decision on either the aggregated rate of return onmultiple investments, or each singly. Clearly the aggregation techniquecan evaluate the best combinations of investments. Therefore instead ofselling investments A, B, and C either singly or in total, the bestafter-tax rate of return combination may be the sale of investments Aand C. This embodiment too, is a clear distinction from traditional stoporders.

Tax consequences can be taken into account when determining a rate ofreturn. The tax treatment of capital gains in losses for various taxjurisdictions (federal, state, or any other taxation entity, includingother countries), also factors into the rate of return treatment. Sincemany taxation entities reward the long-term holding of capital gains,the investor can factor personal taxation rates at various time frames.For example, the investor can select a higher rate of return during theearly, high taxation period. In effect the investor manages to anafter-tax rate of return by demanding higher rate of return as a meansof paying for early capital gains. Beyond the initial period, in whichcapital gains are tax favored, the investor can adjust downward thedesired rate of return.

What follows is an example of tax impact of on a rate of returncalculation. Suppose an investor purchases a $100 stock on January1^(st). The investor simultaneously establishes a tax adjusted rate ofreturn threshold of 8%. Suppose that on December 31^(st) the stock istrading at $110. This represents a 10% increase in absolute terms.However, given that capital gains are taxed as ordinary income forstocks held for less than a year, this $10 gain would be taxed at theinvestor's personal income tax rate—say 35%. Therefore the after-taxvalue is $6.50 ($10−$10×35%). So this is only a 6.5% after-taxreturn—well below the 8% after-tax threshold.

For stocks held for a year or more, the capital gains tax falls to 15%.So if on the next day, January 1^(st), the stock is still trading at$110, the after tax return is $8.50 ($10−$10×15%). This 8.5% return isabove 8% after-tax threshold and, consequently, a sales transactionwould trigger.

Other cash flows that have an impact on the rate of return includedividends, DRIPs and bond coupons. Dividends are paid to the investorusually on a quarterly basis. Beyond appreciation, this is an incentivethat companies provide investors for holding its stock. Because this isan incremental value to the investor, it can be included in the rate ofreturn calculation. For example, an investor can choose to wait untilthe fiscal quarter closes to qualify for a dividend and thereby improvetheir overall rate of return.

Another treatment of a dividend is to automatically have the proceedsreinvested in the stock. Dividend reinvestment programs (DRIPS) arecommon and have the added benefit of having very low associatedcommissions. Therefore the value elements of a DRIP (incremental stockand commission cost) can also factor into the rate of return.

Bond coupons represent another type of cash flow associated withinvestments. A bond is simply a securitized “loan.” The interest paymentto the investors, called a bond coupon, is typically paid to thebondholder semiannually. Some bonds, for example municipal bonds, have alower tax basis. Consequently all elements of a bond (coupons andfavorable tax treatment) can to be factored into the rate of returncalculation.

The rate of return approach embodied in this invention also considersthat the rate of return trigger can represent the market price at whichan investment is sold, or a new “floor price”. For example, a $100 bondat the end of year one with 10% rate of return expectation could triggera sell order once the market price appreciates past $110. Alternatively,upon crossing the 10% annualized rate of return, so long as the marketvalue doesn't decline below 10% the bond continues trading. If at the 1½year mark bond declines to $115.37, then the bond is automatically sold.The 10% expectation is still met, yet it yielded another $5.37 pershare.

The rate of return approach can also be used on a progressive basis. Theinvestor can provide sales instructions that trigger a sell order if thechange in the rate of return declines by a predefined number ofpercentage points. For example, if the present minimum rate of return is8% and, if upon exceeding that level the change in the rate of returndeclines by more that 1% point, than the investment would beautomatically sold. So if the market value climbs such that the highestachieved rate of return is 11%, the new sell order trigger would be 10%,or the highest appreciated rate of return less 1%.

Capital Return

The Capital Return aspect of the present invention provides the investorwith the simultaneous benefit of withdrawing a portion of the investedcapital, yet still maintaining the rights to ongoing capitalappreciation.

With capital return transactions, the investor and broker enter into anagreement in which the criteria are established that enable the investorto the following benefits: to have a portion of the initial capitalreturned to the investor for purposes of reinvestment; and to preservethe investor's rights to the capital appreciation even though a portionof the investment has been returned. In exchange for these benefits tothe investor, the broker too enjoys some incremental benefits and,simultaneously, reduces transaction risks.

The structure of a capital return transaction, for example, can involveevents that occur at two mutually agreed market prices: the market priceat which the capital return transaction is triggered; and the marketprice at which the investment is automatically sold. For example, a bondpurchased at $100 can trigger a capital return transaction when themarket price reaches $110. It is also mutually agreed that the sellorder is automatically triggered if the market value declines from $110to $105, or if it appreciates to $115. From the time of purchase untilsuch time the investment appreciates to $110, the investment is treatedlike any standard investment: the investor remains fully vested in theinvestment and monitors the market price. Once the market valueappreciates to $110—the price at which the capital return transaction istriggered—three simultaneous events occur. First, a portion of theinitial capital—for example $80—is returned to the investor for purposesof reinvestment. Second, the investment is deeded over to the broker.This in effect becomes collateral, wherein the $110 market value exceedsthe $80 value of the returned capital. Third, even though the broker hascontrolling rights to the investment, the investor maintains the rightsto the capital appreciation.

Once the capital return transaction is triggered, the investment remainsviable until such time the sell order criteria is met. Using thisexample, if the market price declines from $110 to $105, the investmentis automatically sold. The broker returns $25 ($105 less the $80 incapital previously returned) to the investor. Conversely, if the marketvalue appreciates to $115, the broker returns $35 ($115 less the $80 incapital previously returned) to the investor. \

One major distinction between traditional margin borrowing and thecapital return aspect of the present invention is that the broker hasabsolute control of triggering a sell order at an appreciated value(that is agreed to by the broker and investor in advance). The brokerhas full protection throughout the life of the investment.

Compared to other capital preservation methods, such as margin accounts,the capital return transactions have a number of inherent advantages.“Margin calls”, the calls brokers make to investors when the valuationof their investment(s) falls below an acceptable level relative to theirmargin of borrowing, becomes a thing of the past. The capital returnapproach actually adds more security to brokerage firms and the markets,alike.

The broker's collateral on a capital return transaction is also superiorto margin accounts. With capital return transactions, the investmentvalue appreciates beyond the initial purchase price before a portion ofthe capital is returned. Therefore the broker has a more positive assetposition.

Capital return transactions have other benefits. To the investor, notonly is capital no longer tied up, but also there is no interest payment(like on margin accounts). Because the broker returns a portion ofcapital at a point later than the time of purchase, the broker should beentitled to receive another commission fee that offsets what would havebeen earned on margin accounts. Therefore the investor defers a cost andthereby improves their rate of return.

Options can provide a limited amount of capital preservation. Instead orbuying directly the underlying stock, bond or other asset, the investorpurchases indirectly at a fraction of the cost the right to buy/sell theunderlying investment. Although the relatively lower capital requirementon options is attractive, there are other risks associated with options.Because options have a limited duration, the time horizon is limited.The transactions costs associated with options (the option cost pluscommissions) are expensive relative to other investment alternatives.Options also require constant monitoring because their price tends to beextremely volatile.

At the time of purchase or thereafter, the investor and broker agreeupon the conditions in which a portion of the capital is returned to theinvestor. The agreed to conditions can include the market valuation thattriggers the transaction; the criteria at which the investment isautomatically sold; and the percentage of the initial capital to bereturned.

For example, a stock that is purchased at $50 for 100 shares can followthese steps. The investor and broker agree that once the marketvaluation reaches $55 that 80% or $4,000 ($40 times 100 shares) of theinitial capital will be returned to the investor provided that theinvestor deed over the stock to the broker and that the broker has theright to automatically sell if the market valuation declines to $52 orexceeds a 12% annual rate of return. In this case the broker holds thestock as collateral—the value of the stock being greater than the valueof the returned capital. If the stock declines to $52, the broker hasthe right to automatically sell, and the proceeds of $12 per share (the$2 gain relative to the purchase price of $50, plus the other 20% ofinvested capital) is returned to the investor. If in a year's time thestock reaches $57.50, or a 15% return, then the broker automaticallysells the stock and returns $17.50 per share (or $7.50 capital gain,relative to the purchase price, plus the other 20% of invested capital).

Throughout this transaction the broker is protected. If the marketvaluation never approaches the trigger price, then the broker handles itlike any other investment transaction. If the $55 trigger condition ismet, the agreed to market valuation trigger is greater than the unitvalue of the returned portion of capital. In the example, the broker hasa $15 or 37.5% cushion (the $55 trigger price versus the $40 capitalreturn). The broker is also deeded over the investment as collateral andthereby has the controlling rights to the sell order—for purposes ofprotecting against a market decline or for protecting an establishedgain. (Margin calls are no longer necessary.)

The investor has two benefits: capital is returned for purposes ofreinvestment; and, simultaneously, the right to continue to enjoyreturns on the first investment. The cumulative compounding effect canlead to even sharper returns. Expanding upon the previous example, ifthe first investment continues to return 15% at the end of year two andthe second investment is purchased at the end of year one and earns a10% return, the combined annualized return is 48.4%, as shown in theexample below.

In exchange for this service and the significant returns it can produce,the broker can negotiate a commission based upon a percentage of thegain. Since the investor only pays the incremental commission in theevent of a capital gain, the investor and broker mutually benefit. Theinvestor also gets a timing benefit, wherein the incremental commissionis paid once the investment is sold, as opposed to early when it ispurchased.

Both aspects of the present invention can actually be used on thepurchase of stocks, bonds, options, futures, and all other investmentinstruments that have market based fluctuating valuations. By example, abond option that is valued at $20, can utilize the rate of returnapproach that is embodied in this invention. If the desired rate ofreturn is 10%, the bond option trigger would automatically execute asell order when its value reaches $20.16 or more in 30 days, or $20.46or greater in 270 days, whichever occurs first. In the case of optionsand futures, the rate of return approach is based upon valuation of thedirect investment—the option or future itself—and simultaneously theunderlying asset (a stock, bond or commodity).

One skilled in the art will understand that there are innumerablevariations to the capital return concept that yield the same results.For example, the broker needn't “own” or have the investment deededover, so long as the broker has the “rights” to automatically sell theinvestment. The broker is fully protected and simply returns to theinvestor the difference of the price at which the investment is sold andthe capital return value.

Another variation involves the price at which the capital returntransaction is triggered. For example, the investor and broker canmutually agree to consummate or “trigger” the capital return transactionat the purchase price. For example, an investor can have $100 to investin several investments, one of which has a market value of $100. Insteadof consuming the entire $100 to purchase the single investment, investorand broker mutually agree that for $20 the investor has the “rights tothe capital gains” on an investment either owned or purchased by thebroker. It is also agreed that the broker will automatically sell theinvestment if its value declines from $100 to $95, or if it appreciatesto $110. In the event of a decline, the broker pays back $15 (the $20initially paid by the investor, less the $5 loss). Conversely if theinvestment is sold at $110, the broker pays the $30 (the $10 inappreciation plus $20 initially paid. In exchange for the investor'sbenefits—rights to the capital appreciation and the ability to preserve$80 in capital to invest elsewhere—the broker is entitled to acommission greater than the standard rate. This incremental commissioncould be paid for in the form of a portion of the capital gains.

One skilled in the art would also recognize that a “broker” could be anytype of intermediary, a full service broker or firm, a discount broker,a specialist, or another financial institution. This commerce can beconducted via the internet, a brokerage system, or a client system.

This invention also provides for a guaranteed sell order price. Todaywhen a sell order price is established (either manually or via sellorder stops), the sell order itself isn't initiated until the currentmarket price equals the threshold price. Since other sell orders may be“ahead”, those investors' orders are processed first. By the time thesell order is actually executed, the market price may have worsened. Theguaranteed sell order price would eliminate the investor's risk of pricedeterioration. With the price guarantee, the broker anticipates the besttiming to sell the investment. For example, a bond trading at $50 pershare could have a stop order in the event it declines to $45. In thetraditional approach the sell order wouldn't be executed until themarket price is $45 or slightly less, thereby exposing the investor toan actual price of less than $45. With the guaranteed approach, thebroker is authorized to sell the investment as it approaches $45—say at$46. Using this approach, the actual price at which the bond is sold maybe $45.75, a $0.75 cushion relative to the $45 target price. Since thebroker assumes the risk, and there is a benefit to the investor not beexposed to a sub-$45 actual sale price, it would be reasonable for thebroker to retain all or most of the $0.75 cushion, in lieu ofincremental commissions. Since brokers are closer to market activity andwill establish an experience base to anticipate the optimal sale timing,an unlikely event is where the broker anticipates too early and the $45threshold is never met. Fortunately the broker can mitigate the risk inone of two ways. Either the broker can remain in a cash position waituntil the market value reaches $45, and realize the $0.75 gain at alater point. Or if the market price suddenly increases, the broker canrepurchase the bond as its value improves.

The guaranteed sell order price can apply to rate of return, capitalreturn and all traditional transactions.

Additional advantages of the invention will be set forth in part in thedescription which follows or may be learned by practice of theinvention. The advantages of the invention will be realized and attainedby means of the elements and combinations particularly pointed out inthe appended claims. It is to be understood that both the foregoinggeneral description and the following detailed description are exemplaryand explanatory only and are not restrictive of the invention, asclaimed.

BRIEF DESCRIPTION OF THE DRAWINGS

The accompanying drawings, which are incorporated in and constitute apart of this specification, illustrate embodiments of the invention andtogether with the description, serve to explain the principles of theinvention.

FIG. 1 is a block diagram showing the “rate of return” aspect of thepresent invention.

FIG. 2 graphically illustrates the minimum rate of return stop relativeto a market price.

FIG. 3 graphically illustrates the maximum rate of loss stop relative toa market price.

FIG. 4 graphically illustrates the maximum rate of loss stops relativeto a market price.

FIG. 5 graphically illustrates the minimum rate of return and maximumrate of loss stops relative to a market price, in combination with othercommon stops.

FIG. 6 graphically illustrates exaggerated rates of returns early in theinvestment, and moderated rates of return thereafter.

FIG. 7 is a block diagram showing the capital return aspect of thepresent invention.

FIG. 8 is a system diagram of the present invention.

FIG. 9 graphically illustrates tax impact on a rate of returncalculation.

FIG. 10 graphically illustrates establishing a rate of return relativeto performance of other investments.

FIG. 11 graphically illustrates the difference in rates of returnbetween the existing investment and the comparison investments.

FIG. 12 graphically illustrates returns on a relative rate of returnpercentage difference basis.

FIG. 13 graphically illustrates establishing a relative rate of returnsubsequent to an investment purchase.

FIG. 14 is a block diagram showing the determining of a rate of returnfor a first investment and the determining of a trigger event for afuture trading period based on the rate of return aspect of the presentinvention.

FIG. 15 is a block diagram showing the determining of a maximum rate ofloss for a first investment and the determining of a trigger event for afuture trading period based on the maximum rate of loss aspect of thepresent invention.

FIG. 16 is a block diagram showing the determining of a first rate ofreturn for at least one derivative, the determining of a second rate ofreturn for at least one asset associated with the derivative, and thedetermining of a trigger event for a future trading period based on thefirst and second rates of return aspect of the present invention.

FIG. 17 is a block diagram showing the returning a portion of capital inan investment aspect of the present invention.

DETAILED DESCRIPTION OF THE INVENTION

Before the present methods and systems are disclosed and described, itis to be understood that this invention is not limited to specificsynthetic methods, specific components, or to particular compositions,as such may, of course, vary. It is also to be understood that theterminology used herein is for the purpose of describing particularembodiments only and is not intended to be limiting.

As used in the specification and the appended claims, the singular forms“a,” “an” and “the” include plural referents unless the context clearlydictates otherwise. Thus, for example, reference to “a stop” includesmixtures of stops, reference to “a stop” includes mixtures of two ormore such stops, and the like.

Ranges may be expressed herein as from “about” one particular value,and/or to “about” another particular value. When such a range isexpressed, another embodiment includes from the one particular valueand/or to the other particular value. Similarly, when values areexpressed as approximations, by use of the antecedent “about,” it willbe understood that the particular value forms another embodiment. Itwill be further understood that the endpoints of each of the ranges aresignificant both in relation to the other endpoint, and independently ofthe other endpoint.

“Optional” or “optionally” means that the subsequently described eventor circumstance may or may not occur, and that the description includesinstances where said event or circumstance occurs and instances where itdoes not.

The present invention may be understood more readily by reference to thefollowing detailed description of embodiments of the invention and theExamples included therein and to the Figures and their previous andfollowing description.

The present invention provides a method and system for accomplishing twomajor investment objectives. The first enables investors to establishsell order criteria based upon a preset the desired rate of return, asopposed to an absolute value. A computer monitors the market pricerelative to the investor's desired rate of return parameters andautomatically sells the investment once the preset rate of returncriteria are met. The invention also encompasses a simultaneoussell/purchase capability. The second major objective is to return someportion of the initial invested capital to the investor whilesimultaneously allowing the investor to maintain rights to ongoingcapital appreciation.

Rate of Return Stop

The rate of return aspect of the present invention enables investors topre-establish the trigger conditions (also referred to as criteria)under which their investments are automatically sold relative to theirdesired rate of return. Instead of having to constantly monitor theprevailing market price for purposes of preserving capital gains orminimizing losses, investors can be assured that their investmentoutcomes are met without constant intervention.

As shown in FIG. 14, disclosed is a method for managing an investmentcomprising determining a rate of return for a first investment 1401 anddetermining a trigger event for a future trading period based on therate of return 1402. The trigger event can occur when a current marketprice of the first investment is greater than or equal to a sell ordertrigger price. The method can also determine if a current market priceof the first investment is greater than or equal to the sell ordertrigger price. The method can further increase the sell order triggerprice in response to an increase in the current market price of thefirst investment. The method can also include selling the investment ifthe current market price of the first investment is greater than orequal to the sell order trigger price and notifying a user, such as aninvestor or a broker, of the sale.

Alternatively, the trigger event can occur when a current market rate ofreturn of the first investment is greater than or equal to thedetermined rate of return. The trigger event can occur when a currentmarket rate of return of a second investment is greater than a currentmarket rate of return on the first investment. In this case, the methodcan also sell the first investment if the trigger event occurs, purchasethe second investment and notify user of the sale and purchase.

The first investment can be a group of investments. The group can be avariety of investments such as stocks, bonds, Exchange Traded Funds(ETF's), currency, indices, and mutual funds. The rate of return in themethod can be adjusted for a factor such as transaction costs,management expenses, tax consequences, dividends, DRIPS's, and bondcoupons.

As seen in FIG. 15, also disclosed is a method for managing aninvestment comprising determining a maximum rate of loss for a firstinvestment 1501 and determining a trigger event for a future tradingperiod based on the maximum rate of loss 1502. The trigger event canoccur when a current market price of the first investment is less thanor equal to a sell order trigger price. The method can also determine ifa current market price of the first investment is less than or equal tothe sell order trigger price. The method can sell the first investmentif the current market price of the investment is less than or equal tothe sell order trigger price and notify a user of the sale.

Alternatively, the trigger event can occur when a current rate of lossof the first investment is greater than or equal to the determined rateof loss. The trigger event can occur when a current market rate of lossof a second investment is less than a current market rate of loss on thefirst investment. The method can then sell the first investment if thetrigger event occurs, purchase the second investment and notify a userof the sale and purchase.

The first investment can be a group of investments. The group can be avariety of investments such as stocks, bonds, Exchange Traded Funds(ETF's), currency, indices, and mutual funds. The rate of loss in themethod can be adjusted for a factor such as transaction costs,management expenses, tax consequences, dividends, DRIPS's, and bondcoupons.

As shown in FIG. 1, at the time of the investment purchase, or prior toits sale by the investor, the investor establishes a desired rate ofreturn and/or maximum rate of loss 100. The broker, or otherintermediary, enters this rate of return information into a computersystem, 101. The computer system calculates for each future trading daythe maximum and minimum values that represent the preset rate of returnand/or maximum rate of loss relative to the purchase price (with orwithout factored commission costs), 102. As the market price fluctuates,the computer system constantly monitors the investment value relative tothat day's rate of return and/or maximum rate of loss sell orderthresholds. If, at 103, the market value does not exceed one of thesethresholds, trading continues. If, at 103, the market value exceeds oneof these thresholds, the investment can be automatically sold and anotification can automatically be sent to the investor and/or broker,104. Exceeding a threshold can include an investment rate of returnbeing greater than or equal to an established minimum rate of return.Exceeding a threshold can include an investment rate of return beingless than or equal to an established maximum rate of loss.

FIG. 2 graphically illustrates the minimum rate of return stop relativeto a market price. An investor, at the time of purchase or thereafter,can establish a minimum desired rate of return. For example, a 10%return on an annualized basis. For a stock purchased at $100, a 10%return would be $102.41 in three months, $104.88 in six months, $110.00in a year, etc. The minimum rate of return plot, 201 in FIG. 2, depictseach trading day's value based upon the purchased price (with possibleadjustments for commissions) and the desired rate of return. As timepasses, the value increases, representing the time value of moneyconcept, whereby the longer one holds an investment the greater itsvalue.

In one embodiment of this invention, if the prevailing market priceexceeds that day's specific rate of return threshold, then theinvestment is automatically sold. Using the previous example, if at thethree month point the market value exceeds $102.41, then the investmentis automatically sold. Since this is time based, if throughout the timesince the investment is purchased its value remains below a 10% rate ofreturn and, in the eleventh month mark it exceeds about $109, then theinvestment is automatically sold, thereby locking in the capital gain ofabout $9. As shown graphically in FIG. 2, the inflection point, 202, atwhich the market price, 203, exceeds the minimum rate of return plot,201 is the point at which the sell order is automatically triggered.

In another embodiment of the present invention, instead of triggering anautomatic sell order as the market value appreciates beyond the desiredrate of return threshold, the sell order could be triggered once themarket value depreciates back to the desired rate of return threshold.The minimum rate of return plot, 201, shown in FIG. 2 could also prompta sell order as the market price, 203, passes through inflection point,202, and subsequently depreciates back toward the minimum rate of returnplot, 201, at the other inflection point, 204. This approach fortriggering a sell order could yield more capital gains at about the samerate of return. Since the minimum rate or return plot, line 201,continues to increase in value over time, the elapsed time betweeninflection point, 202, and the other inflection point, 204, representsappreciated value. An inherent risk in triggering a sell order using theapproach described in inflection point, 204, is that as the marketprice, line 203, declines, there is already downward momentum invaluation. By the time the sell order is actually executed, the actualselling price may produce a rate of return slightly below the desiredlevel.

Just as the rate of return stops can be established relative to theinitial purchase price of the investment, they also can be establishedrelative to the performance of other investments.

As shown in FIG. 10, the rate of return can be tracked over time on theexisting investment as well as one or more comparison investments (forexample, DJIA and S&P500). The investor can compare to any number ofother investments.

In FIG. 10 the existing investment is declining on an absolute base atpoint 1001. If the investor established a rate of return stop order tosell the existing investment when its value declined by 2% or more, theinvestment would be sold at point 1002. However, given the rate ofgrowth of the comparison investments, the investor would have benefitedby selling the existing investment earlier and purchasing one of thecomparison investments.

Several criteria can be established to trigger a sell order using therelative rate of return stop. For example, one approach involvesautomatically selling the existing investment when the rate of return onone of the comparison investments reaches a rate of return threshold,provided that the existing investment itself has a sub par return. Asshown in FIG. 10, a sell order can be triggered when one of thecomparison investments reaches a 3% return, provided the existinginvestment has no return. In period 7 at point 1003, the DJIA shows areturn of 3% and the existing investment has 0% return at point 1004.Therefore both conditions meet the sell order criteria and the existinginvestment would be sold.

Another approach can be evaluating the relative rate of returndifferences when a comparison investment reaches a pre-set threshold.FIG. 11 shows the difference in the rates of between the existinginvestment and the comparison investments. In this example, the pre-setcriteria can be set at 3% rate of return difference, 1101, or a 4% rateof return difference, 1102. In this example, the existing investment canbe sold when the rate of return difference is 3% at point 1101.Alternatively, the existing investment can be sold when the rate ofreturn difference is 4% at point 1102, or generically:

[(R2/R1)^((1/nr))]−[(S2/S1)^((1/ns))]

Another approach compares the returns on a relative rate of returnpercentage difference basis. When the comparison investment has a higherreturn, this approach measures the incremental return the investor islosing relative to the comparison investments. FIG. 12 shows that at a6% relative rate of return difference premium, 1201, the sell order istriggered. The following is a generic representation of the relativerate of return calculation.

${{Relative}\mspace{14mu} {Rate}\mspace{14mu} {of}\mspace{14mu} {Return}} = {\frac{\left( {R\; {2/R}\; 1} \right)^{({1/{nr}})}}{\left( {S\; {2/S}\; 1} \right)^{({1/{ns}})}} - {100\%}}$

S1=Initial value of the existing investment

S2=Current market value of the existing investment

R1=Initial value of the investment being compared

R2=Current market value of investment being compared

ns=Duration period of the existing investment

nr=Duration period of the investment being compared

Note that the duration periods can be different. The duration period ofthe existing investment is the length of time it is owned. The durationof the comparison investment can be the same or less than that of theexisting investment. For example, while holding the existing investment,the investor may choose to start tracking the relative performance of anindex.

Regardless of which relative rate of return stop is utilized, thecomparison to other investments can be established at any point. Forexample, an investor can identify a potential investment subsequent tothe purchase of the existing investment. Using the relative rate ofreturn, the investor can determine the optimal time to sell andsubsequently purchase the new investment. FIG. 13 shows that in period 7at point 1301, the investor establishes a relative rate of return,comparing the existing investment to the S&P 500 and Stock XYZ.Depending upon the relative rate of return approach used, and thethreshold established, the investor can establish criteria for a sellorder trigger that automatically sells the existing investment.Subsequently the investor can manually purchase one of the comparisoninvestments or the comparison investments can be automatically purchasedat the trigger event.

The relative rate of return stop can trigger an automatic purchaseorder. Stops (standard, rate or return, and relative rate of return)provide the convenience and protection for selling investments. However,the time at which the investment is sold is uncertain due to pricefluctuations. Therefore investors often are placed in a reactive mode todetermine their next investment. This time lag between the sale of oneinvestment and the purchase of another creates the potential for lossesin the form of unrealized capital gains.

The comparison investments can be selected as immediate alternatives forpurchase when the sell order criteria are met. In FIG. 11, for example,a simultaneous sell/purchase order can be placed when the relative rateof return difference is 3%, at point 1101. The purchase side order couldbe based upon whichever comparison investment is the greatest. In thiscase the DJIA. Using this approach the rate of return is 1% by the endof period 12, as opposed to losing 2% had the existing investment notbeen sold. Alternatively, if the existing investment was sold in period7 and a 3 period time lag occurred before the DJIA was purchased inperiod 10, the rate of return is 0% at the end of period 12. Thereforethe purchase feature of the relative rate of return can protectinvestors from both an absolute loss, as well as a loss relative tomarket rates of return.

Other sell order rules using the rate of return stop are specificallycontemplated. For example, FIG. 3 shows a sell order trigger based upona change in the rate of return. If the investor chose a rate of returnmethodology in which, beyond the minimum desired rate of return of 10%,301, if the market price, 302, continues to increase beyond inflectionpoint 303 in a manner that the rate of return increases, then the sellorder could be defined as the highest achieved rate of return, less 1%.In this example, if the highest achieved rate of return 304 is at 12%,the sell order trigger would occur at inflection point 305, or 11%, orthe highest achieved rate of return of 12% less 1%.

Just as aforementioned triggering methodologies automatically protectcapital gains, maximum rate of loss threshold triggers a sell order forpurposes of protecting the investment from further loss. As shown inFIG. 4 the maximum rate of loss plot, 401, depicts each trading day'svalue based upon the purchase price (with possible adjustments forcommissions) and the maximum rate of loss. As time passes, the valuedecreases, representing the time value of money concept. So long as themarket price, line 402, remains above the maximum rate of loss plot,401, the sell order is not triggered. If the market price 402 declinesto the maximum rate of loss plot, 401, at inflection point 403, then asell order and notification is automatically executed. One skilled inthe art would understand that the means described for protecting capitalgains can be used in combination with this means of protecting from aloss, as shown in FIG. 4.

Rate of return stops can also be used in combination with commonly usedstops. As shown in FIG. 5, an investor can preset capital gainsconditions wherein the greater of $3 (using the absolute value of acommon stop), 501, or a 10% (using rate of return stop), 502, to triggeran automatic sell order. FIG. 5 also shows that an investor can protectthe loss conditions using a combination of a common stop and a rate ofreturn stop. For example, the investor may be able to tolerate a $2market price decline, 503, for a period of time, and then a 4% rate ofloss thereafter, 504.

Another combination involves rate of return stops exclusively. Incircumstances wherein there is a lot of price volatility in investmenttype (options, for example), or the underlying asset (e.g., the DowJones Industrial Index), an investor can choose to preset a very highrate of return early on, and a more moderate rate of return later. Sincethere is a greater likelihood of a value swing triggering a sell orderearly in the investment cycle, the investor can establish a very highrate of return early on. For example, on a stock purchased at $100 witha desired return of 10%, after 1 month, the trigger value is $100.80.There is a great likelihood of a stock price moving more than 80 centsin a month. As shown in FIG. 6, if instead a desired rate of return of50%, 601, is established in the 6 months, converting to 10%, 602,thereafter, the trigger point would be $110.67 at the 3-month point and$122.47 at the 6-month point. Just as an exaggerated rate of return canbe established early on to protect near term capital gains, anexaggerated rate of loss can also be used in the near term to protectlosses. Also shown in FIG. 6, is a rate of loss of 15%, 603, in thefirst six months, converting to a 6% loss rate, 604, thereafter. At thethree-month point the trigger approaches a value of $96.02, or a $3.98loss. At the nine-month point, the trigger value becomes $95.47.

Rate of return stops can also be used to simultaneously monitor thevaluation an option, future or other derivative and the value of theirunderlying stock, bond, or other asset. Unlike traditional stops, rateof return stops have the capability to simultaneously monitor the option(or other derivative) market price, as well as the underlying stocks (orother base asset) market price, and determining the best combinations ofreturns. This simultaneous rate of return evaluation methodology canevaluate investments singly, in aggregate, or by best combinations. Theinvestor's exposure to taxation laws—treatment of capital losses orfavorable tax treatment for long term holdings—can also be factored intothe rate of return criteria. One skilled at the art could extrapolateother combinations using this concept with the use of put options,futures contract, and innumerable hedging strategies.

Capital Returns

The capital return aspect of the present invention provides twosimultaneous benefits to investors. First, upon meeting certaincriteria, the broker returns some portion of the initial capital to theinvestor for purposes of investment. The other investor benefit is tocontinue to enjoy ongoing capital gains on the first investment.

The capital return transaction can implement an agreement between theinvestor and broker at the time of purchase or anytime prior to the saleof the investment, 700 in FIG. 7. The terms of this agreement caninclude, but are not limited to, the following:

The market price that triggers the return of capital to the investor,stated as an absolute value or a percentage increase.

The percentage or absolute value of the initial capital to be returnedto the investor by the broker.

An agreement as to whether the investor is mandated to invest thereturned capital.

A simultaneous transfer, or deeding over, the investment from theinvestor to the broker.

Preset criteria for which the broker can automatically sell theinvestment, thereby protecting the investor's capital gain as well asthe value of the broker's collateral.

The agreed to commission structure for such a transaction.

As shown in FIG. 7, this information can be entered into a computer,701, for ongoing monitoring purposes, 702. If, at 703, the market pricedoes not reach the agreed to price that triggers the capital returntransaction, trading continues. If, at 703, the market price reaches theagreed to price that triggers the capital return transaction, the agreedto capital is returned to the investor at 704. The investor canreinvests the returned capital, potentially into another capital returntransaction, 705. If at 706, the market price does not exceed the agreedto sell order price, trading continues. If at 706, the market priceexceeds the agreed to sell order price, the capital gains (sales priceless the value of the returned capital) is returned to the investor,707, thereby creating even more capital for reinvestment. Not shown is acondition in which the investment's value declines relative to a presetthreshold and the investment is automatically sold. This threshold canbe set above the initial purchase price, thereby preserving theinvestor's capital gains, as well as the broker's collateral.

The market price that triggers the capital return transaction should begreater on a per unit basis than the amount of capital returned. Sincethis transaction involves the transfer of assets—cash for stock, forexample—the broker should have significant collateral coverage in theevent of a sharp decline in market valuation. Generally the agreed tomarket price that triggers this transaction represents an appreciatedvalue relative to the initial purchase price. Those skilled in the artwould understand that the amount and structure of this concept couldmanifest in myriad ways.

The percentage of the initial invested capital to be returned to theinvestor will depend upon the risk tolerance of the broker. The higherthe market valuation relative to the initial purchase price, the higherthe percentage (potentially up to 100%) the broker is likely to returnto the investor. The amount of capital returned can be stated innumerous ways: as a percentage of the initial invested capital, inabsolute value terms (price per unit/share of price per unit/share timesthe number of involved units/shares), or as a percentage of theprevailing market price. The most expedient form of returning capitalwould involve a credit to the investor's account, although it can alsobe in the form of a check, money transfer, or other unspecified means.It also needn't be in the form of the native or other currency. It couldbe also be another asset of value, such as stocks, bonds, commissioncredits (to promote even more trading), or some combination thereof.

The asset exchange transaction—the simultaneous return of a portion ofthe capital to the investor in exchange for the broker's contractualrights to the investment—must have full recognition of each party'srights. The investor must have the confidence that the capital isreturned relative to the agreement. The broker in this type oftransaction should acquire full control of the asset (absent the rightsto the appreciation) for purposes of collateralization, as well as“superior value” to hedge against a rapid, sharp decline in marketvaluation. (Note that it is not necessary for the broker to have thestock deeded over for collateral. Instead, by having full control of thesell order criteria, the broker could enjoy the same protection.)

The agreement regarding the conditions upon which the investment is soldis for the mutual benefit of the investor and the broker. The investor'sgoal is to continue to enjoy the appreciated value—measured as a rate ofreturn or otherwise—and to protect established capital gains. The brokerseeks to have a certain means of liquidating the investment well abovethe unit value of the capital returned. Having a mutual agreement aroundthe terms of triggering a sell order aligns the objectives, as well asthe necessary assurances of both parties.

By example, an investor and broker can have the following capital returnagreement.

The investor buys a stock at $100.

Once the market price reaches $105, the capital return contract istriggered.

The stock is simultaneously deeded over to the broker and the brokerreturns 80% of the invested capital, or $80 per share.

Although the broker holds the investment, ongoing capital gains belongto the investor.

If the market value falls below $2 relative to its highest appreciatedvalue, the broker has the right to automatically sell the stock.

Using this example, at such time that the market price reaches $105, theinvestor receives $80 per share for purposes of investing. Not only doesthis facilitate potential diversification, by maintaining the ongoingappreciation of the first investment and simultaneously having a second,the investor enjoys an interest free compounded rate of return. Thebroker has a positive net asset position, holding a stock valued at $105per share in exchange for an $80 per share cash outlay. The broker alsogenerates an incremental commission on the second investment. Thisincremental commission far exceeds what the broker would have earned ininterest on a margin account. Therefore there is no need to chargeinterest. In an embodiment of this invention, the broker would have acommission structure based upon a percentage of capital gains, therebyhaving even more incentive to mange this type of transaction. So in theaforementioned example, if the stock reaches a high of $112 and it isautomatically sold at $110, the investor could split a portion of the$10 per share capital gain with the broker.

Illustrated in FIG. 17 is an exemplary method for returning a portion ofcapital in an investment. A capital return trigger event can bedetermined at 1701. A capital return amount can be determined at 1702.An investment sale trigger event can be determined at 1703. Control ofthe sale of the investment can be transferred from an investor to abroker upon the occurrence of the capital return trigger event at 1704.The investor can be provided the capital return amount at 1705.

The capital return trigger event can occur when a current market priceof the investment is less than or equal to a sell order trigger price.Alternatively, the capital return trigger event can occur when a currentmarket rate of return is greater than or equal to a predetermined rateof return. The investment sale trigger event can occur when a currentmarket price of the investment is less than or equal to a sell ordertrigger price.

The method can also determine if a current market price of theinvestment is less than or equal to the sell order trigger price. Themethod can sell the investment if the current market price of theinvestment is less than or equal to the sell order trigger price. Also,the method can sell the investment if the current market price of theinvestment approaches the sell order trigger price.

Transferring control of the sale of the investment can includetransferring ownership of the investment from the investor to the brokeror merely transferring a right to sell the investment from the investorto the broker. The predetermined rate of return can be adjusted for afactor such as, transaction costs, management expenses, taxconsequences, dividends, DRIPS's, and bond coupons. The sell ordertrigger price can be adjusted for a factor such as, transaction costs,management expenses, tax consequences, dividends, DRIPS's, and bondcoupons.

One skilled in the art will understand technicalities that apply to bothaspects of the present invention. The term “broker” can represent aperson that executes an order on behalf of an investor, such as a fullline broker or a specialist. A “broker” could be a system that aninvestor accesses directly, much as one would do with a discount brokervia the internet. It could also involve a combination, wherein a fullline broker sets up the transaction and the investor has onlinecapabilities to make modifications.

There is also a recognition throughout that market pricing can beevaluated on a discrete or continuous basis. A continuous basis ofevaluation can increase the likelihood of capturing market gains andprotecting losses. A continuous basis of evaluation is also morevolatile than discrete approaches, such as daily close quotes.

It is also understood that a target price for either a stop order or thecapital return market price that triggers a capital return or sale, canbe treated in one of two ways. The target price is either a point atwhich an action is initiated (e.g., a sell order) or the guaranteedprice at which a broker agrees to settle. In the former approach, theinvestor faces all the risk. For example, the market valuation may bedeclining rapidly and/or other sell orders are “ahead”. Therefore, intoday's environment, if a stock is trading at $45 and the targetedminimum selling price is $40, the broker waits until the market price isactually $40. In a rapidly declining market actual price at which thestock is sold is likely to be significantly less than $40. The latterapproach, wherein the broker guarantees the settled price, requires thebroker to anticipate when to sell ahead of the guaranteed level. Usingthe same example, if a stock is trading at $45 and the targeted sellingprice is $40, the broker can choose to sell as the market priceapproaches $41. Because the broker anticipates the sale, the actualprice at which the stock is sold could instead be between $41 and $40.This can be of enough benefit to investors that they can be willing topay a premium for the service. The broker meanwhile would be in a betterposition to manage such a risk. So if the actual settled price is$40.74, the $0.74 improvement could either go to the broker for assumingthe risk, or the investor, or shared.

Throughout the discussion of the present invention, there is recognitionof commissions applied to the purchase of investments. One skilled inthe art would understand that the full cost of the transaction should befactored into rate of return considerations.

Because of the higher rate of return associated with both aspects of thepresent invention, brokers are in a position to price commissionsdifferently. Instead of earning a flat commission at the time theinvestment is purchased, brokers could structure the commissions suchthat they receive a percentage of the capital gains, and thereby reducethe upfront commissions. Not only would this be an incremental revenuesource, it would this be an incremental revenue source, it also alignswell with the interest of investors. Since this incremental commissionis only paid when a capital gain is realized, there is little risk tothe investor. Moreover, the investor would realize a time value of moneybenefit, wherein they pay less initially and defer the capital gainsbased commission. In the case of full service brokers, it only pays iftheir investment advice yields results. This commission approach couldbe structured in myriad ways.

In combination, both aspects of the present invention—the rate of returnstop and the capital return—offer investors with greater potential aftertax returns, and better protection against market risks.

Systems Description of the Invention

It is envisioned that both aspects of the present invention will beprocessed with the support of computer systems. The following describesthe proposed system usage.

The system diagram in FIG. 8 shows the involvement of computers toprocess the capital return sell order as well as the rate of returntransaction. The Investor/Broker interface, 801, represents either theplacement of these transactions directly into broker's system (via theinternet, kiosk, or other electronic means) or by means of theinvestor's verbal instruction to the broker for subsequent entry intothe broker's system. The investor's order, 802, could containinformation related to the desired purchase price, rate of return sellorder criteria and/or the capital returns agreement with the broker.This information is transmitted via an electronic means, 803, such as amodem, internet, intranet, direction connection or other means.

Once the order is transmitted to order processing centralcontroller/CPU, 804, the pertinent information is stored and processedin its component parts. The processing components may include but arenot limited to the RAM, 810, the ROM, 811, the clock, 812, video driver,813, and communication port, 814. The databases utilized include a sellorder rules, 815, investor, 816, notification, 817, audit, 818, andsecurity, 819. The sell order rules database, 815, contain most of thepertinent information related to the rate of return stop and capitalreturn agreement, including the minimum rate of gain and maximum rate ofloss criteria, the percentage of capital to be returned, and otherdetails herein the description of the invention. The investor database,816, may include the investor's name, social security/federal taxidentification number, address, and other investor profile information.The database could also include account balances, as well as otherinvestments with corresponding sell order and capital returninformation.

The notification database, 817, contains information that generates aconfirmation of the investment transaction, 805, including the rate ofreturn sell order criteria and/or capital return agreement details.These elements are constantly monitored, 806, relative to the prevailingmarket valuation (s), 807, of the underlying investment.

Once the investment meets the rate of return sell order criteria and/orone of the conditions of the capital return agreement are met, the orderprocessing central controller/CPU, 804, generates a notification, 809,using the investor, 816, and notification, 817, databases.

While there are innumerable ways systems can be configured to processrate of return stops and capital return agreements, the described methodencompasses the major elements of these transactions.

The method can be operational with numerous other general purpose orspecial purpose computing system environments or configurations.Examples of well known computing systems, environments, and/orconfigurations that may be suitable for use with the system and methodinclude, but are not limited to, personal computers, server computers,laptop devices, and multiprocessor systems. Additional examples includeset top boxes, programmable consumer electronics, network PCs,minicomputers, mainframe computers, distributed computing environmentsthat include any of the above systems or devices, and the like.

The method may be described in the general context of computerinstructions, such as program modules, being executed by a computer.Generally, program modules include routines, programs, objects,components, data structures, etc. that perform particular tasks orimplement particular abstract data types. The system and method may alsobe practiced in distributed computing environments where tasks areperformed by remote processing devices that are linked through acommunications network. In a distributed computing environment, programmodules may be located in both local and remote computer storage mediaincluding memory storage devices.

An implementation of the disclosed method may be stored on ortransmitted across some form of computer readable media. Computerreadable media can be any available media that can be accessed by acomputer. By way of example, and not limitation, computer readable mediamay comprise “computer storage media” and “communications media.”“Computer storage media” include volatile and non-volatile, removableand non-removable media implemented in any method or technology forstorage of information such as computer readable instructions, datastructures, program modules, or other data. Computer storage mediaincludes, but is not limited to, RAM, ROM, EEPROM, flash memory or othermemory technology, CD-ROM, digital versatile disks (DVD) or otheroptical storage, magnetic cassettes, magnetic tape, magnetic diskstorage or other magnetic storage devices, or any other medium which canbe used to store the desired information and which can be accessed by acomputer.

The processing of the disclosed method can be performed by softwarecomponents. The disclosed method may be described in the general contextof computer-executable instructions, such as program modules, beingexecuted by one or more computers or other devices. Generally, programmodules include computer code, routines, programs, objects, components,data structures, etc. that perform particular tasks or implementparticular abstract data types. The disclosed method may also bepracticed in grid-based and distributed computing environments wheretasks are performed by remote processing devices that are linked througha communications network. In a distributed computing environment,program modules may be located in both local and remote computer storagemedia including memory storage devices.

While this invention has been described in connection with embodimentsand specific examples, it is not intended that the scope of theinvention be limited to the particular embodiments set forth, as theembodiments herein are intended in all respects to be illustrativerather than restrictive.

Unless otherwise expressly stated, it is in no way intended that anymethod set forth herein be construed as requiring that its steps beperformed in a specific order. Accordingly, where a method claim doesnot actually recite an order to be followed by its steps or it is nototherwise specifically stated in the claims or descriptions that thesteps are to be limited to a specific order, it is no way intended thatan order be inferred, in any respect. This holds for any possiblenon-express basis for interpretation, including: matters of logic withrespect to arrangement of steps or operational flow; plain meaningderived from grammatical organization or punctuation; the number or typeof embodiments described in the specification.

Throughout this application, various publications are referenced. Thedisclosures of these publications in their entireties are herebyincorporated by reference into this application in order to more fullydescribe the state of the art to which this invention pertains.

It will be apparent to those skilled in the art that variousmodifications and variations can be made in the present inventionwithout departing from the scope or spirit of the invention. Otherembodiments of the invention will be apparent to those skilled in theart from consideration of the specification and practice of theinvention disclosed herein. It is intended that the specification andexamples be considered as exemplary only, with a true scope and spiritof the invention being indicated by the following claims.

1.-39. (canceled)
 40. A computer implemented method for managing aninvestment comprising: receiving, by a computer system, a desired firstrate of return for at least one derivative, wherein the first desiredrate of return considers time value of money; receiving, by the computersystem a desired second rate of return for at least one asset associatedwith the derivative, wherein the second desired rate of return considerstime value of money; determining, by the computer system, whether afirst trigger event for a future trading period has occurred based onthe first desired rate of return; determining whether a second triggerevent for the future trading period has occurred based on the seconddesired rate of return; and performing a transaction associated with thederivative and the asset based on at least one of the first triggerevent or the second trigger event.
 41. The method of claim 40, whereinthe first desired rate of return is the same as the second desired rateof return.
 42. The method of claim 40, wherein the derivative isselected from the group consisting of: option, exchange traded options,exchange traded funds, futures contract, warrant, convertible bond, andfinancial contract.
 43. The method of claim 40, wherein the asset isselected from the group consisting of: stock, exchange traded funds,bond, currency, index, and mutual fund.
 44. The method of claim 40,wherein the first trigger event occurs when the current market rate ofreturn for the derivative is greater than the first desired rate ofreturn.
 45. The method of claim 44, wherein the transaction is sellingthe derivative.
 46. The method of claim 45, wherein the second triggerevent occurs when the current market rate of return for the associatedasset is greater than the second desired rate of return.
 47. The methodof claim 46, wherein the transaction is exercising the derivative topurchase the associated asset.
 48. The method of claim 40, wherein thefirst desired rate of return and the second desired rate of return areadjusted for a factor selected from the group consisting of: transactioncosts, management expenses, tax consequences, dividends, DRIPS's, andbond coupons.
 49. A system for managing an investment comprising: amemory; and a processor, wherein the processor is configured forperforming the steps of, receiving, by a computer system, a desiredfirst rate of return for at least one derivative, wherein the firstdesired rate of return considers time value of money, receiving, by thecomputer system a desired second rate of return for at least one assetassociated with the derivative, wherein the second desired rate ofreturn considers time value of money, determining, by the computersystem, whether a first trigger event for a future trading period hasoccurred based on the first desired rate of return, determining whethera second trigger event for the future trading period has occurred basedon the second desired rate of return, and performing a transactionassociated with the derivative and the asset based on at least one ofthe first trigger event or the second trigger event.
 50. Anon-transitory computer readable medium having computer executableinstructions embodied thereon for performing a method of managing aninvestment, the method comprising: receiving, by a computer system, adesired first rate of return for at least one derivative, wherein thefirst desired rate of return considers time value of money; receiving,by the computer system a desired second rate of return for at least oneasset associated with the derivative, wherein the second desired rate ofreturn considers time value of money; determining, by the computersystem, whether a first trigger event for a future trading period hasoccurred based on the first desired rate of return; determining whethera second trigger event for the future trading period has occurred basedon the second desired rate of return; and performing a transactionassociated with the derivative and the asset based on at least one ofthe first trigger event or the second trigger event.